The financial regulator, the Financial Conduct Authority, is considering forcing banks and building societies to pay a minimum interest rate, called a basic savings rate. How would it work?
What’s the problem?
Put simply, the problem is that many banks and some building societies pay virtually no interest on old savings accounts. And the biggest and best known high street banks tend to pay the lowest interest rates on their old savings accounts. In spite of this, they still have the biggest market share for easy access savings accounts and ISAs (by some way).
This isn’t a new problem. In fact, the Financial Conduct Authority (FCA) started looking at this issue over four years ago. It published a paper in 2015 and found that many people had easy access savings accounts and cash ISAs that they’d opened over five years ago. These accounts often paid well below the market rate of interest available on new savings accounts.
Research by the FCA published this week shows that only one in ten people has switched their easy access savings account in the last three years. Approximately the same number have switched easy access cash ISAs.
How could the minimum interest rate work?
It’s worth saying at the start that the Financial Conduct Authority hasn’t definitely decided to force banks to pay a minimum interest rate – called a basic savings rate. It’s one of the ideas it’s currently considering. If it goes ahead, banks would have to pay this minimum interest rate on savings accounts after 12 months.
It’s already named and shamed banks that pay virtually no interest on old savings accounts. The FCA has also tried to make it easier for people to shop around for a new account. But this approach hasn’t stopped banks from paying a paltry rate of interest or resulted in many more people switching accounts.
How low could the minimum savings rate be?
The regulator hasn’t said that it wants to set the basic savings rate. Instead it will be down to banks to set their own interest rates.
When could this take effect?
The FCA is currently consulting about whether or not it should look at this idea. The consultation ends in October so it will be some time before basic savings rates are introduced (if they are).
What you can do now
There are three steps you can take now to make sure your savings don’t earn next to nothing:
Step 1: Find out how much interest your savings are currently earning. Depending on the type of account you have and how long you’ve had it, this may be straightforward or a bit more complicated. Start by digging out your most recent statement, or looking at your bank or building society’s website. If you can’t work out how much interest you’re getting, contact the bank or building society – either via a call centre or a branch.
Step 2: Find out if you can get a better interest rate. You can check several savings or price comparison sites, such as Savings Champion, Moneyfacts or the website MoneySavingExpert. As a general rule, the so-called ‘challenger’ banks, such as supermarket banks, online or mobile only banks or newer names, tend to be more consistent in the interest rates they charge.
Step 3: Switch to get a better interest rate. If you have an ordinary savings account, it’s really straightforward. If you have a cash ISA, the key thing to remember is that you must open the new ISA first, then ask your new ISA provider to do the transfer. You can read more about how to transfer a cash ISA in my article.
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